Legislature needs to address state's pension shortfall
Rocky Mountain News
Published November 19, 2008 at 12:05 a.m.
Individuals' 401(k)s aren't the only investment portfolios taking a beating during the current financial meltdown. Public pensions have also been whacked by the market collapse.
Because taxpayers must ultimately guarantee the solvency of these pension programs, they could be expected to pay up if markets don't stage a rebound that lasts. Which is why public pension managers should be prepared to push for reforms that will limit that liability.
The Colorado Public Employees' Retirement Association investment assets have crashed in recent months, plummeting from $41 billion on Jan. 1 to $31 billion on Oct. 15, more than wiping out solid gains of the past two years.
The losses also suggest the pension fund will be woefully underfunded even after the markets turn around.
PERA's board will meet Friday, and there's no "action item" on the agenda calling for steps to respond to the market collapse. Even so, the 2009 legislature may have to modify benefits or contributions.
Lawmakers in 2004 and 2006 beefed up the pension system in several ways - trimming benefits, raising the retirement age for new hires and mandating higher contributions from employees for several years - as well as hiking the contribution from some public employers.
But lawmakers didn't go far enough. PERA was 75.1 percent funded at the end of last year. Based on the market value of its assets in October, if PERA's $52.5 billion in liabilities have held steady since Jan. 1, the pension may be less than 60 percent funded now.
And based on an estimate reported in the Colorado Springs Business Journal, to compensate for recent losses PERA would have to realize annual average returns of 10.9 percent over the next 40 years to be 100 percent funded by 2050.
We don't like those odds.
Bigger reforms - including some rejected in 2004 and 2006 - should be in order.
Ideally, all new hires should be moved to a 401(k)-style defined-contribution plan. We don't expect this to happen given the present political climate, but such a change eventually would eliminate the need for periodic cash infusions as well as taxpayer exposure to potentially gargantuan unfunded liabilities.
More realistically, the temporary increases in employee contributions enacted in 2006 should become permanent. That legislature boosted the 8 percent contribution from most employees by 0.5 percent a year for six years. The contribution rate is set to return to 8 percent in July 2013. It shouldn't.
Then, the full retirement age for anyone with 30 years of service other than public-safety workers should rise from 55 to 60. The earliest anyone who's not disabled can collect Social Security is 62; public employees shouldn't get such a big, costly head start over their private-sector colleagues.
Finally, the legislature should have the authority to reduce benefits if the system is actuarially unsound - say, less than 90 percent funded. Lawmakers need the flexibility to boost solvency long before massive injections of cash are needed.
Colorado is fortunate because the legislature must approve modifications in benefits or contributions. That's not the case in California, for instance, where the board of its Public Employees' Retirement System can increase benefits or contributions on its own.
PERA faces no immediate cash crunch. But last year, before the swoon, PERA projected the pension would go broke by 2038 if it achieved a 7 percent return on investment.
The 2009 legislature needs to take some significant steps to prevent fiscal disaster while protecting taxpayers from a major blow.
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November 19, 2008
6:30 a.m.
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VietNamVet writes:
All that sounds great, but you will never get it by the Teachers Union. They will continue squeeze the taxpayer for all they can "in the name of the children"...
November 19, 2008
6:33 a.m.
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Gonzopozo writes:
Agreed. Do something (less painless) now to avoid a "big bad bailout" later.
November 19, 2008
7:30 a.m.
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Mike_In_Hartsel writes:
PERA is like highway robbery and the taxpayers are the victims.
I don't have a problem with employer contributions but benefits should be based upon total contributions and what that total can purchase upon retirement not some pie-in-the-sky guarantee.
Do something now - scale it back as far as necessary.
November 19, 2008
7:46 a.m.
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youngman writes:
The legislature has their dog in the kitty too..they make the laws..they get the benefits.....
CUT BENEFITS like everyone else has to.....ooops.... not the government though...what was I thinking
November 19, 2008
8:47 a.m.
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COBearsFan writes:
PERA is highway robbery? Social Security takes your money in one door and out the other and their funding level is far worse than PERA's could ever be, but I don't here you people suggesting a fix for that! PERA members pay their taxes, right along with making their contributions to their own retirement plans, just because they have a great plan than any one of you would kill to have, does not mean they should be penalized for it. Yes, they get a retirement long after a "members" money has been used up, but that is due to investment returns on their money, not your tax money..Taxpayer money? how many of you contribute to PERA out of your check? None of you. So how is this robbery of the tax payer? You don't understand the plan, so don't criticize because your jealous..Invest in a 401k plan? are you stupid? why would people want to invest their money in that type of plan? so they can be broke at retirement just to make the jealous people happy? Do the research, a defined benefits plan works..just because you dont have access to it, does not make it a bad plan. PERA has been around for over 70 years..longer than Social Security itself, and it's in better shape than SS..if you think your being robbed, it's because your putting money into Social Security and you may never see it again, PERA members will see their money, the market will not be down forever, and historically over 20 years time, the market has never seen a loss. PERA's funding is based on 20, 30 and 40 years down the road..they have made it 70 years, no reason not to make it another 70...
November 19, 2008
8:52 a.m.
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Dub writes:
Just wait for the UNIONS to take over!!! Why not allow the whole government scam go belly up, like the rest of us? Have you ever seen a public servant retire at full retirement age? It's 65 for us producers, and we can't claim "back problems" or "mental distress" and retire early.
November 19, 2008
9:32 a.m.
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COBearsFan writes:
You can retire anytime you want to, it's up to you to prove your back problem or mental distress. You make it sound like PERA members retire at 40..LOL..hardly. Most work until they are 60, 65 or even 70.. check your facts at www.copera.org
it's all there in the open for you, nothing hidden, it's a transparent retirement plan, which is more than I can say for Social Security..no wonder you people are pissed off and jealous.
November 19, 2008
9:33 a.m.
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heatvslight writes:
The legislature does not need to address this issue because there is simply not one. The suggestions in this article have not worked at all for other states, municipalities and other organizations:
http://blog.nola.com/updates/2008/08/...
Also if the proposers of these "changes" believe in free markets so much, then they should look at the historical data that suggests the market will end up correcting itself in the long run and deficits will be mitigated. Such changes do not empirically hold water, period. And the whole ironic thing is that members of this RMN editorial board say bailouts for the banks, investment banks, the mortgage industry, auto industry are OK and NEEDED, even when the respective executives were at best, unethical and at worse, criminally fraudulant. But when it comes to a highly improbable future insolvency of PERA, the world will end if the Colorado and/or federal goverment has to help out the public employees' pension. You fools may have duped the public with your false statements about the proposed new leave policy, but the facts and evidence counters and disproves your claims and your respective "solutions". Nice try though! Go throw someone else under the bus!
November 19, 2008
9:42 a.m.
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mmannino writes:
COBearsFan,
You must be a PERA member to make those kind of comments. Most people in this forum do understand the outrageous benefits provided by PERA and other similar plans. Career employees have been provided golden parachutes at expense of the taxpayer. The PERA board makes ridiculous assumptions about the rate of return on its portfolio. When these assumptions are not met, the taxpayer must pay. These assumptions are used to justify subsidized early retirement. A PERA member can retire much younger than the normal retirement age (65) with no loss of benefits. For example, employees hired before 2006 can retire at age 50 after 30 years of service with 75% of highest average salary. In contrast, Social Security only provides full retirement benefits at age 66 with large reductions for earlier retirement at age 62. In addition, Social Security provides a small fraction of the replacement income for higher paid employees (perhaps 10%) compared to 75% for PERA members.
PERA is a source of a vast repository of hidden deferred compensation. I say hidden because the state of Colorado does not recognize that retirement compensation for PERA members is substantially larger than retirement compensation in the private sector. Long term PERA members retire at an average age of 57 with 75% replacement income, inflation protection, and subsidized early retiree medical care. The private sector counter part retires at an increasing age (63+) with much less replacement income, limited inflation protection, and no early retiree medical care. The hidden value of PERA benefits is like a check for $500,000 to subsidize early retirement.
The biggest reform should be to end subsidies for early retirement. PERA members can still retire early but benefit amount will be reduced at the same level as Social Security for early retirements.
November 19, 2008
10:29 a.m.
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mmannino writes:
heatvslight,
You are misinformed perhaps intentionally because you want to reap the tremendous value of highly subsidized early retirement available in PERA. There is a crisis. Pension portfolio values have plummetted and future rates of return must be adjusted substantially downward. Supporters of PERA are trying to postpone major reform so that many more thousands can retire and claim that their benefits are legally protected.
If major reforms are not made soon, there will be major tax increases and service reductions necessary in the next few years. State services and employment levels will have major reductions. Outrageously generous defined benefit pensions are threateninig budgets across the country. The situation will only get much worse if subsidies for early retirement are not ended.
What is the morality of private sector workers subsidizing early retirement (age 50 to 60) for state workers when they cannot retire until 65 to 70? Why do state workers deserve highly subsidized early retirement? Why can't state workers retire at ages typical of the private sector? Why do some state workers deserve a golden parachute to retire at ages 50 to 55?
November 19, 2008
10:52 a.m.
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COBearsFan writes:
If you worked under the same plan for 30 years and were lucky enough to be 50 years old, you would retire too, and you would deserve that opportunity. The golden parachute you speak of is provided by the member themselves. When was the last time you the tax payer paid anything into PERA? 75% of their highest average salary, and not everyone is an administrator or government official, so they are not bringing in thousands of dollars in retirement as you are assuming. I suppose you would rather have everyone have a lousy retirement, just because you do? You want a government job? Go get one, PERA will be there for you too..even custodians, cafeteria food workers get it...so if you want one of these part time jobs..I'm sure any school district would be happy to provide you with one, so you can get a retirement income of a few hundred bucks a month..unless you're educated and lucky enough to run for office and make more money..Social Security will go under before PERA does, and what the private sector wants is to get a hold of PERA's money and subsize Social Security..unlike you, I wont be depending on Obama and Social Security to cut me a $200 a month retirement check, because my money has been invested, with a rate of return better than the private sectors..I know where my retirement will come from..I have yet to see one penny come from "the tax payers"..like you all claim to be doing..all PERA's funds come from the members own contributions, investments and returns..not from your "private sector" checks..
November 19, 2008
11:09 a.m.
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mmannino writes:
COBearsFan,
The golden parachute is provided by the taxpayer. The golden parachute is a result of the huge value of risk assumed by the taxpayer if targeted rates of return do not materialize. The targeted rates of return have fallen far short of the realized returns so the taxpayer has already provided a large bailout. If major reforms are not made soon, huge taxpayer bailouts will be required in the future.
You do not deserve to retire at age 50 just because you have worked for the same employer for 30 years. Most people work 40 to 50 years before being able to retire. State workers should not be any different. The PERA fund is not nearly sufficient to support the current level of benefits. You want a bailout just like many others. I object to providing a bailout for that is nothing more than a huge subsidy for very early retirement.
November 19, 2008
11:22 a.m.
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COBearsFan writes:
Mannino, there is no bailout, there will be no bailout, never has been one. So you think that all those people who retired from the private sector after 20 years didnt deserve it? You think someone who works since they were 20 to age 50 for the same employer can't either? So, people should be made to work until they are 65 and 70? This is the mentality that is needed to keep Social Security afloat. The longer you work, the longer they can continue to move money in one door and out the other. Since there are a lot more "private sector" employees out there, why is Social Security failing miserably? Compared to Social Security and the private sector, those who recieve a Public Pension are far less, but yet in better shape..Seems to me, you are trying to reform the wrong Pension Plan...
November 19, 2008
11:23 a.m.
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heatvslight writes:
Mmannio,
You are a complete liar and have not provided ANY evidence that backs up ANY of your claims. I provided links that prove your assertions to be wrong. In addition you have no idea how PERA works and thus is funded. PERA is funded by an employee/employer contribution that would have otherwise gone to social security. The only additional benefit is that these contributions are done at a pre-tax level. Nonetheless, PERA beneficiaries give up the social security benefit under the social security windfall provision. So it ends up being an immaterial wash, where there is not a direct or extraordinary loss/cost to the taxpayer. Secondly, people who are employed with institutions that have a PERA plan are in it for the long-term. These respective institutions do not provide stock options, bonuses, employer matched 401(k) plan, direct employee discount programs and the pay for performance plan that was adopted a few years ago for Colorado employees is now unfunded. So the trade off that pubic sector employees make is that they are willing to for give up perks such as stock options, equivalent private sector base salaries/perks, EMPLOYER MATCHED 401(k) plans, etc, in exchange for long-term retirement financial stability. In essence, the public employee is willing to take less now to smooth out income later. Until you start talking about implementing similar private sector perks and FUND them, as mentioned above, then a defined contribution plan is off the table, period. In addition, PERA not only covers state employees but also various municipalities’ employees, nonprofit sectors, and private sector employees that do contracting for the respective public and non-profit employers. So a one-size fits all approach simply cannot work, especially when a problem is simply not there. Also ERISA and SSN provisions provide a safety net if PERA were to become insolvent. This would have no material impact on the Colorado Taxpayer. You still haven’t answered why is it ok to have a taxpayer bailout for PRIVATE SECTOR companies that were govern by unethical if not potentially criminal executives/employees but God forbid to make up any potential shorfalls to a pension that were neither unethical or criminal in any shape or form.
November 19, 2008
11:28 a.m.
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COBearsFan writes:
Oh, wait, Social Security wasn't meant to be a Pension Plan was it?...it's supposed to subsidize your retirment plan..but of course most private sector people don't have one, they rely on the Government for the SS check when they reach age 65 and then cry because they don't have enough money to live on..wahhh. PERA members invest for their future, by contributing a mandatory 8% of their salary into the plan, with judges and state troopers contributing even higher rates...plus the employers contributions..PERA invests that money globally, it does not take it from your check or any other tax payers check ( by the way, PERA people pay taxes too, just so you understand)...Just because the private sector can't seem to understand that you must do your part to prepare for retirement, does not mean you get to take away the retirement plans for those who did.
November 19, 2008
11:36 a.m.
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COBearsFan writes:
Mannino, another point in fact, I know more about PERA than you will ever know..inside and out. So if the Private Sector plan is so great, why isn't it working for you Mannino? www.copera.org, do your research before you spout off about how Taxpayers are being robbed by PERA and having to bail out PERA. Seems to me you are trying to "bailout" your retirment by taking away the retirement of those who "serve" you.
November 19, 2008
12:16 p.m.
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heatvslight writes:
mmannino writes:
“Most people in this forum do understand the outrageous benefits provided by PERA and other similar plans.”
NO ONE elected you to speak for ANY one here!
“The PERA board makes ridiculous assumptions about the rate of return on its portfolio. When these assumptions are not met, the taxpayer must pay… If major reforms are not made soon, there will be major tax increases and service reductions necessary in the next few years… The golden parachute is a result of the huge value of risk assumed by the taxpayer if targeted rates of return do not materialize.”
Prove this! Extrapolate this claim from any of the financial footnotes provided by PERA of you have any other source of information, provide it! Come up with your own actuary model that backs up this claim! Even in the worst case scenario with the respective possibilities of insolvency, PERA has insurance that covers this liability, furthermore if needed, the ERISA and SSN provisions would pick up any overflow, which is simply not happening so the Colorado taxpayer will not take a material hit, even in the worse case scenario.
“PERA is a source of a vast repository of hidden deferred compensation… The biggest reform should be to end subsidies for early retirement…PERA members can still retire early but benefit amount will be reduced at the same level as Social Security for early retirements…The golden parachute is provided by the taxpayee.”
This is completely false!!!
What is your alternative calculation of this “hidden deferred compensation”? Please define what, how much and how long is an average public employees’ golden parachute?
According to a 2008 EBRI study of private vs. public sector savings plans and rates, Public employees have a retirement plan participation rate of 86% compared to 51% in the private sector and the respective contribution difference is twelve to one!!! In light of the fact that public employees do not have the luxury of having an employer match 401(k) plan!
“Why do state workers deserve highly subsidized early retirement?”
As demonstrated before, it is not subsidized by any form. It is funded by a mandated higher contribution by the employees than social security or even in the private sector see: www.copera.org and http://www.federalreserve.gov/BoardDo...
“Why can't state workers retire at ages typical of the private sector?... Why do some state workers deserve a golden parachute to retire at ages 50 to 55?”
Public workers are willing to set aside more income now for a higher retirement income later as proven in CO PERA’s plan: www.copera.org
Mmannino, comeback to the grown-ups’ table when you have facts and evidence to support your assertions (lies). Because with truth, facts and evidence, Colorado WINS!!! Next!
November 19, 2008
12:30 p.m.
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mmannino writes:
COBearsFan,
I am not sure about your knowledge of PERA. I am confident about my knowledge of deferred compensation and PERA. I have more understanding of deferred compensation and PERA than anyone in the state.
PERA members want a bailout. I am not asking for anyone to cover the losses in my retirement account. It is not that the private sector is so great. It is that private sector retirement compensation is not heavily subsidized like PERA and similar plans.
PERA members received a large bailout in the 2005 bill. PERA members will try to postpone reforms so that they can cry for a much larger bailout in a few years. The pension plan assets and future rates of return are substantially inadequate to provide future benefit levels. PERA and similar plans provide highly subsidized early retirement. It is standard practice that benefits for early retirement (65-) are substantially reduced from benefits available at normal retirement age (65+). PERA and similar plans provide full benefits (without the reduction) for early retirement.
November 19, 2008
12:59 p.m.
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mmannino writes:
heatvslight,
You are very good at insults but your knowledge of pensions is biased. Your sources are biased towards the large industry that supports public employee pensions.
You can find my study in the Journal of Pension Economics and Finance, the top academic journal about pensions. I have made detailed calculations to support my claims based on the best data ever assembled in an academic study about deferred compensation. PERA and the state government do not calculate retirement compensation. They calculate funding levels and contribution rates. The large value of risk assumption for career employees is an important factor in assessing deferred compensation.
PERA can make any assumptions about plan growth. The assumptions probably look reasonable when made. The problem with assumptions is the consequences when the assumptions are not met. PERA adamently states that members have a legal right to benefits (even if not retired) regardless of portfolio performance. In the 2005 pension reform law, taxpayers were committed to increased contributions to fund the portfolio shortfall. I am confident that PERA will ask the legislature for a much larger future bailout if major reform is not made soon.
November 19, 2008
1:07 p.m.
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heatvslight writes:
mmannino writes:
“I am not sure about your knowledge of PERA. I am confident about my knowledge of deferred compensation and PERA. I have more understanding of deferred compensation and PERA than anyone in the state.”
This is only true if you are employee of PERA, which is HIGHLY doubtful.
“PERA members want a bailout.”
Prove and cite where any PERA member let alone PERA is asking for a bailout. The article reference to PERA’s meeting agenda above disproves this statement!
“PERA members received a large bailout in the 2005 bill.”
PERA never received a bailout in 2005 they just got a cash infusion from combining funds with DPS:
http://www.copera.org/pdf/Legislation...
“The pension plan assets and future rates of return are substantially inadequate to provide future benefit levels. PERA and similar plans provide highly subsidized early retirement. It is standard practice that benefits for early retirement (65-) are substantially reduced from benefits available at normal retirement age (65+). PERA and similar plans provide full benefits (without the reduction) for early retirement.”
Where is the data to back this up? You have not provided any citable facts to back this up. If you were so “knowledgeable” about PERA, you would be able to provide data, facts, birth/death rate models of the respective funds to substantiate your claims. Son, you need to quit while you’re behind!
November 19, 2008
1:21 p.m.
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heatvslight writes:
Mmannino,
When you get published in the American Economic Review or the Journal of Political Economics, not a nth tier specialized journal, then give me a call. I was educated at the University of Chicago, dept. Math and Economics, the liquor doesn’t flow freely here as it does in Arizona. Maybe you’re just suffering from a continuous hangover since. But still, you have not substantiated any of your claims. Nice try though!
November 19, 2008
1:43 p.m.
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mmannino writes:
The bailout was in SENATE BILL 06-235. I mistakenly said the bailout was in a 2005 bill. This bill mandated substantially larger employer contributions, hence a bailout. This bill also reduced pension benefits somewhat for new hires. All existing employees were left with the higher benefit levels however.
Given the practices in other states, the 2006 law, and PERA's steadfast claims that retirement benefits cannot be decreased for existing employees, I am confident that PERA members and their Democrat allies will come forward in the next few years for a major bailout. In California, the public employee unions have demanded and received large bailouts of their pensions in this decade. Of course, the future is uncertain so perhaps the stock market will regain all of its lost value and everyone will be happy. I would not bet on this outcome however.
November 19, 2008
2:07 p.m.
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mmannino writes:
heatvslight,
Bravo for your insults! Perhaps there is a reasoned response in them but I cannot find any.
I agree that the Journal of Pension Economics and Finance is more specialized than the journals that you mention. It is a highly regarded journal, however, despite your claims. Some of the best pension research in the world is published in this journal. If you want, please refute my data and claims. You seem more interested in hurling insults than providing reasoned responses.
If you have produced any similar studies, please inform this forum. I am sure that your substantial background would allow you to conduct a major study each month.
November 19, 2008
2:30 p.m.
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heatvslight writes:
mmannino writes:
"If you have produced any similar studies, please inform this forum. I am sure that your substantial background would allow you to conduct a major study each month."
You're confusing supply with demand. I provided several reasoned responses. Such as the differences in intertemporal choices between private and public sector workers, differences in chosen compensation bundles and preferences. My biggest issue is that PERA members are not asking for a bailout (and there is no point in arguing principal/agency issues. They have been argued ad nausem) and the fact that public policy "remedies" are not applied fairly when addressing the same problem in a different context (PAC contributors). If anything, TIAA-CREF via AIG is asking for a bailout. In the end, it is rent seeking for everyone. Just some people are wise enough not to go against their own interests, while others do and wonder why the sky is falling.
November 19, 2008
6:23 p.m.
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mmannino writes:
heatvslight,
I am not sure how I am confusing supply with demand. Can you elaborate?
You seem to make two points: differences between public and private employment and the increase in successful rent seeking behavior. I would argue that public employment has become substantially more attractive to private employment in the last decade. Increased volatility and decreased incentives in the private sector have had a major negative impact on the private sector. The only risk in public defined benefit pensions is mobility/termination risk. Given the fewer opportunities in the private sector, mobility is much less of a concern now.
Today, almost everyone would prefer a pension like PERA. Many would eagerly drop out of Social Security to participate in PERA. PERA is not sustainable without a substantial bailout. I do not fault the management of the portfolio. The market has declined dramatically and economic assumptions have changed. I do object to PERA supporters insisting that the world has not changed. The taxpayer can no longer afford to provide the highly subsidized early retirement in PERA and similar plans.
The banks were given bailout because of a fear that the entire banking industry would collapse. I do not know whether the bailout was a good idea. Just because the banks were given a bailout does not mean that public employee pensions should be given a bailout. Public employee pensions should be reformed to eliminate the excesses, primarily highly subsidized early retirement. A reasonable tradeoff is to make the changes in exchange for less impact on state services and employment levels.
November 21, 2008
7:28 a.m.
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Elwood writes:
Gee, looks like a couple of PERA-bots are defending their taxpayer funded pensions. Yes, they are taxpayer funded. Wait until the Dow drops another $2000, then you'll see the proof.
November 24, 2008
11:01 a.m.
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peter303 writes:
I know a large number of Pera pensionaires who retired in early 50s at nearly full salary (usually had to buy extra years of service which were equivalent to 22% interest bonds). No private plan is this generous. They arent going to get much sympathy from voters.
November 24, 2008
11:22 a.m.
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peter303 writes:
"Pera-sites" is a more provocative term than "Pera-bots"